Thursday, July 17, 2008

Europe's economy takes a hit and investment implications

A Spanish construction group Martinsa-Fardesa filed for US $ 17.7 billion bankruptcy protection on Tuesday. By right, this should not come as a surprise as the strains have been obvious a few months ago.

As ECB taking a hard stand against inflation which is a correct way but it will prolong the downturn.

Questions to ask:
(i) Euro currency has been rising due to rate increase, however, if the economy is slumping, guess what will happen to Euro? Where will the money go if funds are unwinding?

(ii) With US has taken the stimulus package, banks rescue, cut interest rate deeply and latest move to ban shorting 19 financial institutions, will there be a turnaround in the US economy, US dollar and stock market? Or at least one dead cat bounce, just one bounce please, before the market is capitulated?

(iii) There are only a few countries in this world with strong reserves as a percentage of GDP ? Will these countries(see chart) be the favorite investment destinations? But then if financial markets could not decoupled from each other, will economy fundamentals matter?

(iv) Will hard asset like precious metals will be the favorites when central bankers got sick of losing money on soft asset?

(v) I think industrial commodities should turn south. However, I was still bit unsure about crude oil as it has not reached to a very dangerous bullish level yet(compare to past cycle). Remember Soros said recessions in the US and UK ( now potentially Euro zone also) will do a nice job to knock down the oil price?

Nevertheless, I see good opportunity to accumulate when violent corrections set in.

I will be out of town for next few days. Will try to find time to post whenever I can find time. Good luck to all.

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